Activity Based Costing (ABC System)

Activity Based Costing (ABC)

Financing system is generally divided into two types, namely conventional cost accounting system. Conventional cost accounting systems using the unit / quantity of product produced as the basis for imposition. Such loading method is often referred to as Unit-Based System. In this system, the costs incurred are recorded, collected and controlled based on the elements into centers of responsibility. In this way the production costs are also determined by the amount of resources absorbed by each cost center. There are two methods used to calculate the cost of the product is as follows:

1. Full Cost Method

Full cost method is a method of determining the cost of production which takes into account all elements of production costs in the cost of products which consist of raw material costs, direct labor costs, and factory overhead costs, both fixed and variable. Full cost method is intended to meet the interests of external parties.

2.Variable Cost Method

Variable cost method is a method of determining the cost of production is only mempehitungkan production costs are variable in the cost of production. The fee includes the cost of materials, direct labor costs, and variable factory overhead costs. This variable cost method is intended to serve the interests of the internal party.

Advanced manufacturing technology environment requires the accounting information system designed to manage the activities and maintain a competitive advantage. The system is called accounting activity or also called Activity Based Costing System (ABC System). This system can also be used to assess the performance of the new ways. In the ABC System, the activity is considered as the cause of the cost of production. But more than that, ABC System also emphasizes the aspects of the planning, control and decision making by managers.

In general terms Activity Based Costing System (ABC System) is a system that collects fees costs into activities that occurred in the last company to charge or activity to a product or service, and report the cost of activities and the products or services on management that can then be used for planning, cost control, and decision making.

Activity Based Costing System arising as a result of accounting information management needs to be capable of reflecting resource consumption in a variety of activities to produce. The need for accurate information about the costs caused by the following things:

1. Global competition (Global Competition) facing manufacturing companies forced management to seek alternatives that cost-effective manufacturing of products.

2. The use of advanced technology in the manufacture of the product causes the proportion of factory overhead costs in product cost becomes dominant.

3. To be able to win the competition in the global competition, manufacturing companies must implement a market-driven strategy.

4. Market-driven strategy for innovative demand management.

5. Use of computer technology in the processing of accounting data allows for a wide range of information processing costs are very helpful with reasonable accuracy.

Benefits of the system costs Activity-Based Costing (ABC) for the management of the company is:

1. An assessment of the cost of the ABC system can convince management that they should take a number of steps to become more competitive. As a result, they can strive to improve quality while simultaneously focusing on cost reduction are possible. This analysis could highlight how really expensive manufacturing process, this in turn may stimulate the activity of organizing processes, improve quality, and reduce costs.

2. The management will be in a position to make a more fair competitive bidding.

3. ABC costing systems can help in the decision making (management decision making) make-buy that management had to do, in addition to the more accurate determination of costs then the decision will be taken by the management phak will be better and more precise. It is based that the accuracy of the calculation of the cost of the products that become very important in today's competitive climate.

4. Supports continuous improvement (continuous improvement), through the analysis of the activity, the ABC system allows the elimination or corrective action against non-value-added activities or less efficient. It is closely related to the company's productivity problem.

5. Facilitate the determination of costs that are less relevant (cost reduction), in traditional systems, many costs are less relevant are hidden. ABC system is transparent causing sources such costs can be determined and eliminated.

6. With an improved cost analysis, management piliak can perform more accurate analysis of the production volumes needed to achieve breakeven (break-even) on low volume products.

Some of the advantages of the system costs Activity Based Costing (ABC) in the determination of the cost of production is as follows:

a. Cost of products that are more realistic, especially in high-tech manufacturing industry where overhead costs are a significant proportion of the total cost.

b. The more overhead can be traced to the product. In a modern factory, there are a number of activities that develop non factory floor. Analysis of ABC costing system itself paying attention to all the activity so that the cost of the activity that is non traceable factory floor.

c. ABC cost system recognizes that aktivitaslah which causes costs (activities cause cost) is not a product, and a product that consumes activity.

d. ABC cost system focuses attention on the real nature of the behavior of costs and assist in reducing costs and identifying activities that do not add value to the product.

e. ABC cost system recognizes the complexity of the diversity of production modem using a lot of booster charge (multiple cost drivers), many of these costs are hyper-based transactions (transaction-based) of the volume-based products.

f. ABC cost system provides a reliable indication of the long-term variable product cost (long run variable product cost) that are relevant to the strategic decision-making.

g. ABC cost system is flexible enough to explore the cost to the process, the customer, managerial responsibility area, and also the cost of the product.

A consistent finding from traditional cost accounting books are inaccuracies in using information it costs to run a manufacturing plant. This differs from the ABC cost system that provides more accurate cost information. ABC costing system trace indirect production costs to unit, batch, product trajectory, and the entire facility is based on the activity of each level. This method of determining the cost to produce the final cost of the product more accurate and more realistic.

Some comparisons between the cost of traditional systems and system costs Activity-Based Costing (ABC) is expressed by Amin Widjaja in his book "Activity-Based Costing for manufacturing and marketing", is as follows:

1.Sistem ABC cost using activities as a driver of cost (cost driver) to determine how much overhead consumption of each product. While the traditional system of allocating overhead costs arbitrarily by one or two base allocations non representative.

2. ABC cost systems focusing on the cost, quality and time factors. Traditional cost system focused on short-term financial performance as profit. If the fee system traditionally used for the pricing and profitability of products, the figures are not reliable.

3.Sistem ABC costs focusing on cost, quality and time factors. ABC costing system requires input from all departments, this requirement leads to a better integration of the organization and provide a cross-functional view of the organization.

4.Sistem costs ABC has a much smaller need for analysis of a variant of the traditional system, because the group costs (cost pools) and boosters cost (cost driver) is much more accurate and clear, in addition to the ABC can use historical cost data at the end of the period to dissipate the actual cost if the need arises.

5. In the traditional cost system of determining rates of a product based on the activity level of the unit (materials and labor). While at ABC System overhead loading unit-level activity-based and non-unit so that a more accurate determination of the cost because traced to each product.

Traditional cost systems put one or two boosters fee-based unit as pembeban costs thus creating a distorted product costs. Distortions in the form of cross-subsidy (cross subsidy) between the product, the product had excess costs (overcosting) and other products experiencing a shortage charge (undercosting). The level of distortion that occurs depends on the proportion of overhead costs to the total production costs. The larger the proportion, the greater the distortion that occurs and vice versa. This is what underlies the development of system costs Activity-Based Costing.

The development of activity based financing (ABC system) was initially constituted by an improvement in product costing accuracy in manufacturing perusahaa which generally produces many products. The problem faced by the company in general is how to produce many kinds of products with plant overhead charge to those products. In traditional cost accounting application, the concept of volume-related drivers used to charge overhead plant to plant, so that the product cost burden resulting from the imposition of how this becomes inaccurate. In the ABC system offers a more varied basic loading, such as batch-related drivers, drivers sustaining product and sustaining facility driversuntuk factory overhead charge to the various types of products produced by the company yan. With the various drivers that correspond to the types of products produced cost accounting can yield information accurate product cost burden, so that it will ease the management of the decision making process on selling prices and in analyzing the profitability of each type of product.

In further developments, the ABC system is no longer limited their use only to generate load information accurate product costs. ABC system at this time is a concept which is broadly defined as an information system to motivate individuals undergoing improvement to the process used by the company to produce products / services to the customer. ABC system is utilized to overcome the disadvantages of traditional accounting baiaya designed specifically for manufacturing enterprises. All types of companies (manufacturing, services, trade) and organizations (public sector and non-profit) can now utilize the ABC system as a cost accounting system, both for the purpose of cost reduction (cost reduction) and for accurately calculating the costs of product features / services. If in the early stages perkembanannya, ABC system only focused on factory overhead costs, whereas in the later development stage, the ABC system applied to all costs, ranging from design costs, production costs, cost of sales, after-sales costs, to general and administrative expenses. ABC system uses activity as the focal point (focal point) to account for the cost. Therefore, the activity is not only found in manufacturing companies, and is not limited in the production stage, the ABC system can be used in various types of organizations and include the cost of outside production.

Activity-Based Costing (ABC) has been developed in the organization as a solution to the problems can not be solved properly by traditional cost system. ABC system is a system so that the concept is still new and growing, so there are a variety of definitions that describe the ABC cost system itself. Some experts give a definition of the cost management system of the cost of Activity-Based Costing as follows:

1. Wayne J. Morse, James R. Davis and AL Hartgraves

In his book Management Accounting (1991) provides a definition of the Activity-Based Costing (ABC), as the system of allocation and reallocation of costs to cost objects on the basis of the activity that causes the costs. The ABC system is based on the premise that the activity causes costs and activity costs should be allocated to cost objects on the basis of the cost of activities consumed. The ABC system trace costs to products as the basis for activities that used to produce the products.

2. Ray H. Garrison

In his book Managerial Accounting (1991) provides a definition of the Activity-Based Costing (ABC), as a method of cost calculation that creates a group fee for each event or transaction (activity) in an organization that serves as a booster charge. Overhead costs were then allocated to the products and services on the basis of the number of events or transactions of products or services produced it.

3. Douglas T. Hicks

In his book Activity-Based Costing for Small and Mid-sized Busines An Implementation Guide (1992) provides a definition of the Activity-Based Costing (ABC), as is as a cost accounting concept that is based on the premise that products consume activities and activities that give rise to costs , In the ABC cost system is designed so that any costs that can not be allocated directly to the product, be charged to products based on the activity and the cost of each activity and then charged to a product based on the consumption of each of these activities.

4. Gayle L. Rayburn

In his book-Using Cost Accounting Cost Management Approach (1993) provides a definition of the Activity-Based Costing (ABC), as a system that recognizes that the implementation of the activity causing resource consumption is recorded as an expense, or in other words that the ABC is an approach calculation based on transaction costs. ABC cost system itself is allocated to the transaction costs of the activities carried out within an organization, and then allocate these costs appropriately to the products according to usage activities of each product.

5. Charles T. Horngren, Gary L. and William O. Stratton Sundem

In his Introduction to Management Accounting (1996) provides a definition of the Activity-Based Costing (ABC), as a system which is costing approach that focuses on the activity as a fundamental cost objects istem ABC uses the cost of such activities as the basis for allocating costs keobjek other costs such as products, services, or customers.

The concept of the ABC System change with the development of the implementation of the ABC System itself. At the beginning of its development, ABC System is used as a tool to improve the accuracy of the calculation of the cost of the product, but the latest development, ABC System has evolved in such a way that it becomes "a new way of doing business".

There are two basic belief underlying the ABC System:

1. Cost is the caused. No fee charge is the cause and the cause of the activity. Thus, a thorough understanding of the activities which cause personal expenses the company will put in a position that could affect the cost. ABC System departing from the basic belief that the resource provides the ability to perform activities, not just causing costs should be allocated.

2. The causes of the cost can be managed. Cause occurred costs (ie activity) can be managed. Through its management of the activities that cause the occurrence of costs, personnel of the company may affect the cost. Management of activity requires a variety of information about the activities.

Two basic belief underlying the ABC system is presented more clearly in Figure 3. In Figure 3, illustrates that the management of activities intended to direct all activities of the organization to the provision of products / services for the benefit of meeting the needs of costumers. The whole is used to produce products / services assessed the benefits from the point of view of costumers. Examples of information about the activities are: customers are consuming activity output, value-and non-value-added activities, resources driver, activity drivers, driver quantity, cycle effectiveness (CE), capacity resource, budget type (fixed type, variable type, step type).

Although theoretically it can be seen that the ABC System provides many benefits for the company, but not all companies can implement this system. There are two fundamental things that must be met by the company that will implement the ABC System, namely:

1. Fees based non-unit shall constitute a significant percentage of overhead costs. If these costs a small amount, then there is absolutely no problem in allocating to each product.

2. The consumption ratios between activities based units and activities based units and activities based on non-unit should be different. If the range of products using all overhead activities with roughly the same ratio, then there is no problem if the cost driver based unit used to allocate all overhead costs to each product. If the ratio of consumption of various products together, then the conventional system or ABC System imposes factory overhead in the same amount. So companies whose products are homogeneous (low product diversification) can use the conventional system without any problems.

Traditional cost accounting system overhead charge of loading the factory through two stages, namely the imposition of overheads such as traditional cost accounting system. The difference between the two methods lies in the base load (cost driver) used. Traditional cost accounting system using only one base load (cost driver) the production unit, while the ABC System using more than one cost driver so that the information generated is also more accurate and thorough. Stages of imposition of factory overhead costs on ABC System are:

Phase I

1. Factory overhead costs charged to the appropriate activities.

2. The costs of such activities are grouped into several homogeneous cost pool.

3. Determining the rate for each group (cost pool). Rates are calculated by dividing the sum of all costs in the cost pool dengna a measure of the activity undertaken. The pool rates also means that the cost per unit booster charge (cost driver).

Phase II

The costs charged to the activity of the product is based on consumption or demand by the activity of each product. So at this stage the costs of each pool activity traced to the product by the use of pool rates and magnitude of resources consumed by each product. The magnitude of these resources is a simplification of the cost spur quantity consumed by each product.

In the first stage, the activity is identified, the costs charged to activities related activity are combined into one group, the group formed a kind of fees, and group rates are calculated. In the second stage, any request for resource products group was measured and the costs charged to products using this demand and rates that represent the group. However, to avoid confusion on the basic concept, we avoided any detailed discussion of some of the first stage of the procedure steps. We now turn to a more detailed description of the first two steps: (1) identification of activities and (2) the classification of activities into similar groups. How the costs charged to the activities discussed in the different sections.

The concept of the ABC System, that the cost of the products generated by the activity, whether the activity is related to the volume of products or activities that are not related to the volume of products. BOP is the cost of which will be attributable to the product based triggers costs (cost drivers), not based on the volume of products.

Activities are actions repeatedly to meet business functions. Each activity can be determined as a value added or non-value added. Kaplan (1991), states that the cost management system has two sides measuring performance, the financial and non-financial. Financial performance measurement is used for periodic performance measurement and for determination of accurate product costs. While non-financial performance measurements can be used to develop and continuously improve the production process by reducing non-value added time. This refers to the continuous improvement philosophy of value-added processing (value added manufacturing), which refers to the activity of manufacturing the best and simple, so that the system becomes more efficient manufacturing.

In value added manufaturing, waste interpreted broadly, that is any activity in the processing that does not produce value added, such as inspection time, waiting time and moving time.Dengan so if there is no wastage of the value of each inspection time, waiting time and moving time equal to zero. Non value added can be caused by factors that are systemic, physical and human, for example, the machine has a system that requires every production process must be in a large batch, less skilled labor resulting in increased labor costs.

1.Aktivitas-activity level adjacent Unit

Activity-level unit (unit-level activities) are activities undertaken whenever a unit of product produced, the size of this activity is influenced by the number of units of products produced. For example, direct labor, machine hours and hours of electricity (energy) is used any time a unit of product produced.

2.Aktivitas-activity level adjacent Batch

Batch-level activities are activities that are performed each time a batch of product manufactured, the size of this activity is influenced by the batch number of the product being produced. Examples of activities that are included in this group is the setup activity, the activity of production scheduling, materials management activities (movement of materials and purchase order), inspection activity.

3.Aktivitas-activity level adjacent Products

Product-level activities are activities undertaken to support a wide range of products manufactured by the company. These activities consume inputs to develop products or allow products produced and sold. Examples of activities that are included in this group is the activity of research and product development, process engineering, product specifications, engineering changes and product enhancements.

4.Aktivitas berlevel Facilities

Facility-level activity is covering activities to sustain the process of pemanufakturan generally required to provide facilities or the capacity of the plant to produce the product, but the extent of this activity is not related to volume or product mix manufactured. Examples of these activities include, for example: plant management, building maintenance, security, landscaping, plant lighting, cleanliness, land and building tax (PBB), as well as depreciation of plant.

Cost Pool is a group costs caused by that activity together with a base load (cost driver). Cost pool is used to simplify the management in charge costs incurred. Cost pool contains activities whose costs had a positive correlation between the cost driver with the cost of the activity. Each cost pool to accommodate the costs of transactions are homogeneous. The higher the degree of similarity of the activity carried out within the company, the less the cost pool is needed to charge these costs. Cost system that uses multiple cost pool would better explain the causal relationship between the costs incurred by the products produced.

Cost pool is useful for determining the cost pool rate which is the rate of factory overhead cost per unit of cost driver is calculated for each group activity. Group rates calculated by the formula total overhead for a particular activity group was divided baseline measurement of the group's activities.

Cost driver or triggers used to charge a fee to output activity that is structurally different from those used in conventional charge system. Or causal factors that explain consumption overhead. Cost driver is the basis used to charge collected on cost pool to the product.

Identify the cost driver is an important component in controlling non value-added costs. If the individual's performance is affected by its ability to control costs no value added, then the selection of cost driver cost driver and how they are used can influence the behavior of individuals. If the cost driver for the cost of setup fee selected is setup time, the incentives must be created for workers so that they can reduce setup time.